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this is one question Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company is
this is one question
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (fight 482) is as follows: Ticket revenue (180 seats * 401 occupancy * $240 ticket price) $ 17,280 100.00 Variable expenses ($16.00 per person) 1.152 6.7 Contribution margin 16,128 93.38 Flight expenses Salaries, light crew $1,600 Plight promotion 760 Depreciation of aircraft 1,500 Fuel for aircraft 5,700 Liability Insurance 5,400 Balaries, light assistanta 1,400 Baggage loading and light preparation 1,750 Overnight coata for flight crew and assistants at destination 800 Total flight expenses 10,910 Het operating loss $ (2,782) The following additional information is available about flight 482 a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a "high-risk" area. The remaining two-thirds would be unaffected by a decision to drop flight 482 c. The baggage loading and fight preparation expense is an allocation of ground crews' salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the company's total baggage loading and flight preparation expenses d. I fight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight 6.7 $240 ticket price) $ 17,280 100.00 Variable expenses ($16.00 per person) 1,152 Contribution margin 16,128 93.39 Flight expenses: Salaries, flight crew $ 1,600 Flight promotion 760 Depreciation of aircraft 1,500 Fuel for aircraft 5,700 Liability insurance 5,400 Salaries, flight assistants 1,400 Baggage loading and flight preparation 1,750 Overnight costs for flight crew and assistants at destination 800 Total flight expenses 18,910 Net operating 106 $ (2,782) The following additional information is available about light 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete. b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a "high-risk" area. The remaining two-thirds would be unaffected by a decision to drop flight 482. c. The baggage loading and flight preparation expense is an allocation of ground crews' salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the company's total baggage loading and flight preparation expenses. d. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight e. Aircraft depreciation is due entirely to obsolescence Depreciation due to wear and tear is negligible 1. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of light crew on its payroll Required: 1. What is the financial advantage (disadvantage) of discontinuing flight 482 Step by Step Solution
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